A “liquidated damages” clause in your business contract is a legal tool that can be very advantageous.
In a liquidated damages clause, the contracting parties agree in advance to an estimate of the damages when damages would be difficult to precisely determine, such as in contract for the sale of business; the breach of a covenant not to compete; or the breach of a long-term franchise agreement.
Liquidated Damages clauses can provide three key benefits to the contracting parties:
- The parties assert a greater level of control over the manner in which contract breaches are handled;
- The parties avoid the difficulty and expense of proving damages in the event of a breach; and
- The parties can agree in advance on a reasonable cap on the amount of damages that can be recovered.
The agreed upon amount of Liquidated Damages must be reasonable in light of both the anticipated or actual losses caused by the breach. An estimated sum that is grossly disproportionate to any possible damages is an unenforceable penalty. However, even if the court voids the liquidated damages clause, the non-breaching party can seek to recover for their actual losses and damages.